SEC should require fiduciary standard

Jan 16, 2011 @ 12:01 am

In the name of investor protection, we urge the Securities and Exchange Commission to exercise its rulemaking authority to require brokers to act in their clients' undivided best interests at all times. We are also reiterating our call for the SEC to recommend to Congress that the jurisdiction of the Financial Industry

Regulatory Authority Inc. be expanded to include investment advisers — only if a uniform, uncompromising fiduciary standard is adopted for all providers of financial advice.

Worried as we are that bad blood between Finra and investment adviser/financial planner trade groups will make it difficult for the two sides to work together, we have concluded that an expansion of Finra's jurisdiction is logical and offers the greatest hope of assuring that investors are protected from unscrupulous advisers, shady business practices and even from their own worst instincts.

Under the Dodd-Frank financial reform law, the SEC must submit to Congress by Friday a study about the differences between investment adviser and broker-dealer oversight, and identify any existing regulatory gaps. The 77-year-old SEC, which has “investor protection” as part of its mission, then is authorized to promulgate a universal-standard-of-care rule that covers anyone who provides personalized retail investment advice.

Currently, two standards exist.

Investment advisers, who are overseen by the SEC and state securities regulators, are held to the fiduciary standard, which requires them always to put their clients' interests ahead of their own. Brokers, meanwhile, are regulated by Finra and held to a much less stringent “suitability” standard, which requires only that their recommendations to clients be “appropriate.”


For uninformed investors — and that constitutes the vast majority of Americans — the difference between the two standards can fairly be equated to getting behind the wheel of an automobile with or without wearing a seat belt. Although the seat belt may be unnecessary on 99% of all road trips, it would likely prove lifesaving on the 1% of trips involving a car wreck.

In an era when cost cutting has led many public companies to pull the plug on defined-benefit pension plans — thereby forcing individual investors to shoulder the responsibility of funding their own retirements — it is incumbent on the SEC to make sure that investors receive the same high level of protection, regardless of whether the adviser sitting across from them is a registered representative of a broker-dealer or an investment adviser.

Put simply: A single standard would eradicate far-reaching confusion among investors about advisers' titles, obligations and legal responsibilities to their clients.

A 2008 report published by the Rand Corp. concluded that most investors couldn't distinguish between brokers and investment advisers. And a 2010 study sponsored in part by the Certified Financial Planner Board of Standards Inc., the Consumer Federation of America, the Financial Planning Association, the National Association of Personal Financial Advisors and the North American Securities Administrators Association Inc. found that more than 60% of investors surveyed operated under the false notion that their brokers and insurance agents are held to a fiduciary standard.

In reaching for a uniform standard, we urge the SEC to resist the pressure to “harmonize” the fiduciary and suitability standards. Such an approach would inevitably result in a variety of “fiduciary lite” standards, each of which would be applied to different advisers under different circumstances and be accompanied by endless disclosures that would end up obfuscating more than illuminating.

That, of course, is totally unacceptable, as it would do little to ameliorate confusion among investors and, in fact, would likely exacerbate it.

Instead, the SEC should require anyone who provides retail financial advice to investors to adhere to a strong and uniform fiduciary standard of care, consistent with the standard applied to investment advisers under the Investment Advisers Act of 1940 and affirmed by the Supreme Court.

Under such a standard, all advisers — regardless of whether they were associated with broker-dealers or investment advisers — would be required to put the client's interests first; act with the skill, care, diligence and good judgment of a professional; provide full and fair disclosure of all important facts; avoid conflicts of interest, and fully disclose and fairly manage, in the client's favor, any unavoidable conflicts.

Of course, imposing the fiduciary standard on all advisers would accomplish little unless the appropriate mechanism is in place to assure that the standard is enforced and upheld. For that reason, we call for Finra's powers to be expanded to include jurisdiction over the nation's more than 11,500 registered investment advisers.

One could argue that a separate SRO for investment advisers would be the simplest and best solution. Or that the CFP Board, which is well versed in upholding the fiduciary standard, is qualified to oversee investment advisers.

But those solutions pose problems, requiring the assembly of a staff from scratch and coming up with some means of paying them.

Finra, on the other hand, has an existing enforcement structure and a staff in place. It wouldn't need to reinvent the wheel in order to assume additional oversight of investment advisers.

Finra would charge advisory firms for the additional oversight and that charge, no doubt, would be paid for by investors. But they would be paying for extra protection.

Many will argue that the SEC and the states already have the responsibility for monitoring and regulating the investment advisory firms registered with them.

That is true, but the reality is that the SEC and the states have too much on their plates and both are dependent on government funding. Let's be honest: Protecting investors from unscrupulous advisers generates far fewer votes than building highways or subsidizing farmers.

As it stands, the SEC already faces severe budget constraints. As a result, it expects to examine only about 9% of investment advisers over the next fiscal year.

A special task force made up of representatives of Finra, the CFP Board, the FPA, the Investment Adviser Association and other adviser/planner trade groups should be created and given responsibility for setting explicit rules governing Finra's oversight of investment advisers.

Furthermore, Finra would have to demonstrate a willingness to change its broker-oriented culture.

One way of doing that would be to reorganize — though not necessarily expand — its Board of Governors to include a representative number of investment advisers. Another would be to scrap mandatory arbitration for defrauded investors.

No matter how advisers are regulated, the SEC must not abdicate its duty to protect investors. In a world where the line between a broker and an investment adviser is fuzzy at best and misleading at worst, the only way to fulfill that duty is to require any provider of investment advice — even a broker giving advice that is incidental to a transaction — to adhere to the fiduciary standard.


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